Investor transparency has long been a foundational piece of the stock market. Following the 1929 market crash which led to the Great Depression, the United States passed the Securities Act of 1934, which required public companies to register with the Securities and Exchange Commission (“SEC”) and provide detailed financial information on a regular basis.

The goal of this act, and of the SEC, was to regulate public companies and ensure that investors had all the relevant information needed in order to make investment decisions. In 1955 the SEC began requiring public companies conduct semi-annual reporting.

By 1970 the SEC increased this frequency further, mandating that companies share financial information with the market four times a year. Quarterly reporting is still mandatory today for publicly listed companies in the United States.

These quarterly reports are a key source of information for investors and provide markets with regular flows of information to guide decision-making. Overall, quarterly reports offer investors transparency on company performance, and greater transparency results in fairer markets and valuations.

While quarterly reports have provided transparency to investors, some have questioned the practice. Pundits argue that this standard forces management teams to focus on short-term gains instead of long-term growth. Furthermore, these reports can be costly to prepare, especially for smaller companies.

That’s why earlier this week, President Trump reiterated a proposal from his first term to reduce earnings reports to every six months. According to him, this change would save companies money on compliance costs and allow managers to focus more on operations.

Amidst this renewed push, the Long-Term Stock Exchange announced its plans to send a petition to the SEC to do away with the quarterly reporting standard. The SEC is now reviewing this proposal.

However, popular sentiment at the moment is that reducing the frequency of reporting will cost investors more than it will save management teams. Earnings releases already mark some of the most volatile days for companies’ stock prices, as investors react to a flow of new information. 

If companies were to only report twice per year, this volatility would likely be much more extreme as investors reckon with a business’ evolution over the course of six months. And in today’s market environment, investors demand information from companies at a far higher rate than twice per year.

The growth of AI has shortened the business cycle, and constant innovations in technology change the market landscape sometimes on a monthly basis.

Based on how much can change for a company today within a six-month period, investors cannot afford to hear from businesses twice a year and be expected to accurately value companies.

While there is precedence in the fact that management teams feel constrained by quarterly reports and the importance of short-term performance over long-term goals, eliminating quarterly reporting may not be the optimal solution.

If companies and investors want their management teams to focus on the long term, the solution may already exist in an existing annual filing, the DEF 14A. The DEF 14A outlines management compensation frameworks. 

It provides information on the compensation mix between salary, yearly bonuses, and long-term equity awards, as well as the metrics that determine these payouts.

Through the DEF 14A and a company’s compensation framework, companies can incentivize management teams to prioritize long-term performance over short-term goals, and vice versa. 

Rather than sacrificing investor transparency, management teams who feel pressured by quarterly reporting and the need to deliver on short term targets should evaluate their compensation framework, and adjust their payment terms to reward and incentivize management on a longer-term view.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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